U.S. Court of Appeals Rules in Favor of Pro-Israel Organization in IRS Discriminatory "Israel Special Policy" Case

WASHINGTON, DC — June 23, 2015: On June 19, 2015, the U.S. Court of Appeals for the District of Columbia permitted a lawsuit to proceed against the Internal Revenue Service (IRS) for its alleged anti-Israel discriminatory practices (See Attached Ruling). The organization, Z Street, a nonprofit organization "devoted to educating the public about Zionism" and "the facts relating to the Middle East," applied for Federal tax exempt status under section 501(c)(3) of the Internal Revenue Code. When an IRS agent allegedly revealed that the IRS had an "Israel Special Policy" meant to apply additional scrutiny to an organization holding "political views inconsistent with those espoused by the Obama administration," Z Street brought a case in U.S. district court seeking relief from the IRS's alleged unconstitutional delay in reviewing its application and applying stricter scrutiny than to other tax exempt applicants.

"What strikes me as unusual in this case," said Charles Ruchelman, a tax attorney with the law firm of Caplin & Drysdale in Washington, D.C., "is the awkward tax-related defenses that the IRS invoked to defeat Z Street's claims as well as the unusual decision to appeal the pro-Z Street ruling by the U.S. district court." Not only did the IRS delay ruling on Z Street's tax exempt application, but it filed a motion to dismiss the case at the district court level, and then immediately appealed the adverse ruling to the court of appeals. "Due to all these delays," Ruchelman said, "Z Street has not yet had its day in court to determine whether these troubling allegations are true."

Like the U.S. district court, the U.S. Court of Appeals ruled against the IRS. The court said that the IRS could not avoid Z Street's action based on the Anti-Injunction Act because Z Street's claims are not trying to enjoin the assessment or collection of any taxes. Rather, Z Street is seeking a non-discriminatory review of its Federal tax exemption application. Ruchelman said that the "First Amendment prohibits the IRS from discriminating based on viewpoint."

The case is Z Street v. Commissioner of Internal Revenue, U.S. Court Appeals for the District of Columbia, No. 15-5010. For more information, please contact Charles M. Ruchelman at cruchelman@capdale.com or 202.862.7834.

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